Tuesday, July 28, 2009

Tick Size Weightage, should it be lower or higher ?

Unlike MOTS which is pretty much factual, tick size effect on the other hand has many disputable intrepretations.

Tick size is the smallest gap one investment vehicle can move its price to. For example, RM 1.01 with a tick size of RM 0.01 can make its next smallest movement to either RM 1.00 or RM 1.02. It can NEVER be RM 1.005 nor RM 1.015 for example.

Tick size is usually defined within a range of price. For example, from RM 1.00 to RM 9.99, the tick size is RM 0.01.

Tick size weightage is the tick size over the price. For example, RM 0.01 over RM 1 is 1%.

Because the tick size is definied with a range of price, the tick size weightage will differ from one price to another. For example, RM 0.01 over RM 2 is only 0.5% in relation to 1% for the RM1 example.

Some people treats tick size as an investment cost. Because if you buy and sell immediately, the buy sell spread is usually 1 tick size away (only apply to liquid investment vehicles). So you will always be selling one stick size lower than your buying price. For example, if you have just buy a share price at RM 1.01 and you want to sell it immediately, the highest buyer price would most probably be at RM 1.00, hence you may lost an additional1% of your investment by selling immediately.

For this reason some people prefer smaller tick size. The smaller it is, the lowest cost it is.

Some other people want to sell stocks to make profit as soon as possible, ie. in one tick away. However, there are always some cost associate to investment. For example in stock investment, there are brokerage fee, stamp duty and clearing fee. Assume it is 1.68% excluding the tick size effect following this example. If you sell at next up tick size which would earn you 1%, minusing the cost you still lost 0.68%.

In this scenario, one would want the tick size to be bigger than its transaction cost. In above example, the tick size should be more than 1.68%. That way, one could earn money with just one tick away - Fast and Furious !

So as you may see, sometimes we want to tick size to be as small as possible, some other times we want the tick size to be larger than our transactional cost.

Some may have spotted the problematic argument above that if tick size is bigger than transactional cost, no doubt one can 'earn' when the tick goes up, but he will lose 'MORE' when the tick goes down. Hence he is taking a big risk to expect a small reward. Although that is true, but in order to earn money the 'fastest' way, you will need this big tick size. In other words, its a risk you will have to take if you want fast profit.

Therefore, people who want bigger tick size are usually speculators. Their aims are to earn money quick. Even in a falling market, it is still possible for speculator to earn from small up trend at a particular time.

On the other hand, people who want smaller tick size are usually longer term investor. They usually have a target price and such a target is usually quite many ticks away. Hence, the size of ONE tick doest NOT bother them that much. Except that if the tick size is small, they can earn more in long run by paying lower cost.

So Long Term Investors
wants smaller tick size
while
Speculators wants bigger tick size

Do you like smaller or bigger tick size ?

3 comments:

imDavidLee said...

i only target on long term currently

imDavidLee said...

nice blog..can we exchange link?

Michael Tsen said...

of course can, u r guru in malaysia finance blogsphere, I am just a newbie, its my greatest pleasure to exchange. but I thought i already link to yours :)